CH. 17 revenue recognition ACCT 320

revenue recognition standard

companies recognize and measure revenue based on changed in assets (rights to recieve consideration) or liabilities (performance obligations to transfer goods or services) arising from contracts with customers

revenue recognition standard contract purpose

the contract is the lifeblood of business and determines the terms of the transaction, measurement of the consideration, and the promises to be met by both parties.

key objective of revenue recognition

recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that the company receives (or expects to recieve) in exchange for these goods or services

5 step process for rev rec

1. ideentify the contract with customers

2. identify the seperate performance obligations in the contract

3. determine the transition price

4. allocate the transaction price to the seperate performance obligations

5. recognize revenue when each performance obligation is satisfied

revenue recognition principle

recognize revenue in the accounting period when the performance obligation is satisfied

revenue from a contract with a customer cannot be recognized until a contract exists

1. the contract has a commercial substance

2. the parties to the contract have approved the contract

3. the company can identify each partys rights regarding the goods or services to be provided

4. the company can identify the payment terms for the goods and services to be transferred

5. it is probable that the company will collect the payment to which it is entitled

types of transactions

selling inventory, providing a service, permitting use of an asset, selling an asset other than inventory

sales rev timing of recognition

date of sale (delivery)

service or fee revenue timing of recognition

when services have been performed and are billable

interest, rent, or royalty revenue timing of recognition

as time passes or assets are used

gain/loss of sale or trade in timing of recognition

date of sale or trade in

selling inventory (sales rev) examples

clothes, car, phone, groceries

providing a service (service or fee revenue) example

airlines, uber, plumber, barber, landscaping

permitting use of an asset (interest, royalty or rent revenue examples

use of building, use of $ loans, use of intellectual properties

selling an asset other than inventory (gain/loss on disposition) examples

sell pp&e, company, investments, (not primary business).

how to detemines if more than one performance obligation…

is the product or service distinct within the contract? is it sold seperately? is one element possible w/o the other?

transaction price

the amount of consideration a company expects to receive from a customer in exchange for goods and services

time value of money

1. considered if there is a significant timing difference between transfer of goods or services and payment

2. the revenue recognized at transfer of goods or services = the fair value of the consideration to be received

noncash consideration

if consideration recieved is in the form of goods, services, or other non-cash items, companies recognize revenue on the bases of the fair value of what was recieved

consideration paid or payable to the customer

reduce the consideration recieved and the amount of revenue recognized

examples of consideration paid or payable to the customer

discounts, volume rebates, coupons, free products, etc.

variable consideration

if the price of a good or a service depends on future events, companies must estimate the amount it will receive so the amount of revenue to recognize can be determined.

examples of variable consideration

performance bonuses, capfed getting finished faster, more bonuses, slower → fines

expected value

a probability-weighted amount in a range of probable consideration outcomes

most likely amount

the single most likely amount in a range of possible consideration outcomes